The direction of travel seems to be toward the sooner, rather than later camp, but if that means we will see a move late this year, early next year or only after the election remains to be seen.
According to Joshua McCallum, head of fixed income economics at UBS Global Asset Management, exactly when the BoE is going to raise rates is of less concern than what is happening in the forward market.
As he explained to Portfolio Adviser, “The turn in the rate cycle happened last year in the forward market.”
But he added: “It is important to remember that, if the BoE meets market expectations then, trying to time one’s entry based on when the Bank raises rates doesn’t make sense because what is priced in is what you will get.”
That said, he is of the view that the forward curve is currently pricing in too slow a move.
“I think the Bank will move sooner on rates than is expected, but it will be cautious on the pace of change because, given the level of openness in the UK economy, the impact on inflation of a move in rates is greater than in other, more closed economies.”
Another point worth noting, he says, is that for many, the expectation is that an increase in rates will mean an end to the upturn in the credit market.
This, he says, is unlikely for a number of reasons. The first is the sheer weight of money remaining in fixed income.
“It is not that people are willing to hold bonds, but that they have been willing to do so at such low yields,” he said.
This is also evident in the flow of funds data, which shows that while equity issuances have fallen significantly over the course of the last ten years, credit issuances (particularly Treasury and Agency net of Fed purchases) have risen even more substantially.
The other point to be made, he said, is that there is likely to be a good pick up in the European credit market, which, while small, is likely to see an increased reliance on credit.
This, he said, is because European corporates have historically relied much more heavily on bank funding than their American counterparts, but that has changed as banks have increasingly been regulated into much less lending.
Also, on the back of the European Central Bank’s pronouncements last week, McCallum said, the asset backed securities market is set to benefit.
